Archive for January, 2010

The late economist John Maynard Keynes has been mentioned more than once in the news coverage of President Obama’s State of the Union speech.

For a little comic relief from all the analysis of Washington and our economy, here’s a fun video – OK, so maybe fun is in the eye of the beholder – let’s call it an educational video on opposing approaches to macroeconomics.

This clip is the work of EconStories.tv, a newly launched educational venture of Russell Roberts, professor of Economics at George Mason University; John Papola, a producer-director; and a crew of dozens.

Good for a chuckle. And we might as well chuckle. If the news from Washington is any indication, Keynes already won this rap contest and Hayek has gone silent.

If you’re feeling more serious about the dismal science and economic policy’s impact on all of our companies, National Public Radio offers this view of Obama the Keynesian. Talk back by offering a comment – or a rap of your own.

If you’ve wondered what the Berkhshire Hathaway annual meeting is like – from parties to steakhouses to sightseeing in Omaha to asking “the Oracle” a question, Mattathias Schwartz offers a first-timer’s view of the pilgrimage to capitalism in the January 2010 Harper’s Magazine.

“The Church of Warren Buffett” (online access limited to subscribers) is an entertaining, if somewhat cynical, look at the phenomenon of BRK and its loyal shareholders – though it falls short of real insight into either Buffett’s investing approach or the relationship of the company with its investors.

I won’t spoil it for you, except for this taste, a quote from the Berkshire Hathaway Owner’s Manual, a 1996 manifesto of Buffett and Charlie Munger’s philosophy of shareownership that the company still offers on its home page:

Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family. For our part, we do not view Berkshire shareholders as faceless members of an ever-shifting crowd, but rather as co-venturers who have entrusted their funds to us for what may well turn out to be the remainder of their lives.

Now that’s targeting long-term investors. More CEOs could express those feelings.

This year’s Berkshire meeting will be Saturday May 1, with parties all weekend. But you can save the plane fare to Omaha, and the cost of BRK.A or BRK.B shares, by picking up the magazine. Or just spend an hour exploring Berkshire’s website. Ultra-plain in presentation, matching the cultivated down-home-ness of Buffett himself, the site offers a wealth of interesting reading and philosophy on investors.

While political junkies are dithering about how corporate money might sway the 2010 elections, corporations and investor relations professionals should realize that the Jan. 21 Citizens United decision presages a different kind of elections: more shareholder proposals on political activity and spending.

Leading the charge on this issue since 2003, a Washington advocacy group called the Center for Political Accountability has worked with labor unions, religious groups and others to file proxy proposals – more than 60 in 2008 and again in 2009. These generally would require semi-annual reports describing political contributions and who makes the decisions – posted on company websites – along with special oversight by boards of directors of political efforts.

Within hours, the Center for Political Accountability announced the Supreme Court ruling makes it “more critical” to press corporations for change on this issue. The advocacy group negotiates for self-policing by companies it targets, and it says more than 65 companies have adopted disclosure and board supervision.

Since shareholder activism may be Plan B for labor unions and liberal groups seeking to curb corporate money that might fund election efforts, I’m guessing we’ll see a lot more proxy proposals.

Of course, Plan C might be for Congress or the Securities and Exchange Commission to get into the act by requiring some form of disclosure or oversight of corporate political giving. Stay tuned.

As you know from reading the papers, Washington “powers that be” have two impulses when it comes to Wall Street and stock market activity:

If it’s an activity where people can lose money, we need to regulate it.

If it’s a thing where people can make too much money, we need to regulate it – and maybe just outright squash it.

Following the market’s unfortunate meltdown in 2007-09, and the even more unfortunate fact that Wall Streeters who remain are taking home big bonuses, Congress and the Obama Administration are in full rush to “do something.” You know, do something so “this will never happen again.” No one believes that last part – mostly it’s about casting blame and seeming to punish someone – but they are working on a wave of escalating regulation, which could be very real.

Update: On Jan. 21 President Obama pledged to go after big banks, again using that “never again” language. Among other things he proposed a ban on proprietary trading by banks, curbs on advising hedge funds and limits on involvement in “risky financial products.” Depending on how it’s structured, this might greatly reduce trading – or just drive traders out of mega-banks into smaller firms.

Earlier this week the Kansas City chapters of NIRI and the Security Traders Association put on an educational panel, “Not Your Grandma’s Market Anymore,” on how the new world of trading affects public companies. The Jan. 19 audience was a mix of 50 investor relations people, long-term investors and short-term traders, all in one room.

Speakers were Joe Ratterman, CEO of BATS Global Markets, the No. 3 US equity exchange behind Nasdaq and NYSE; Tim Quast, managing director of ModernIR, an analytics firm that tracks trading patterns for public companies; and Jeff Albright, VP and head of equity trading for mutual fund family Waddell & Reed. I moderated.

In another post, I’ll share ideas from the session on what investor relations people can do amid this new world of trading. But let’s start with Washington – because regulatory excess in trading could do a lot of damage to the markets our public companies depend upon. Some examples of what the power brokers are up to:

Democrats in Congress are proposing a new tax of 0.25% to 0.5% on securities transactions – every trade of stocks, options, futures, etc. Proponents say the tax could raise as much as $354 billion a year for Uncle Sam and curb “speculative excess” by cutting total trading volume, say, 25% to 50%. Those last numbers are, well, speculative – no one knows what the actual impact of lobbing a new tax into the markets would be.

The SEC proposes to regulate dark pools, whose very name suggests something sinister – should have sent that one to the branding consultant before going with “dark pools.” They’re generally platforms for securities firms to match orders and do proprietary trades without disclosing price and volume offers. The new SEC rules would bring that trading out into the open.

Also targeted by the SEC are flash orders. Flash trading essentially is a way automated traders’ computers can get a peek at pending orders from other investors 30 milliseconds before those orders go to the broader market. The fear is that high-tech trading desks are gaining an unfair advantage.

And, of course, the SEC has been tinkering with rules on short selling, a hot button for some companies that have felt victimized on the downside of the market – and another unpopular group of Wall Streeters.

Now, the opinions here are my own – I can’t speak for the other panelists. My takeaway from the discussion was that, yes, technological and regulatory changes of recent years have created a huge new realm that basically is automated trading.

Perhaps two-thirds of the trading volume in US stocks is short-term activity. The traders are math majors who program computers to make or withdraw offers from the market, hundreds or thousands of small trades at a time, in milliseconds. They use algorithms to implement strategies based on tiny anomalies in price, or theories about market movement. The activities go by a bunch of acronyms and names like “high-frequency trading.” They use ultra-fast technology.

And, yes, this trading activity makes life complicated – both for public companies trying to figure out what is happening with our stocks day-to-day, and for individual or institutional investors who may be trying to do a trade for long-term investment but encounter a flurry of “noise” moving the price or spiking volume.

The fact that life has become more complicated, however, doesn’t mean it’s worse – or that trading cries out for a regulatory crackdown. Automated trading certainly was not responsible for the financial meltdown we just came through, and those traders Washington likes to label “speculators” aren’t doing anything wrong.

The societal benefit of short-term trading, as it emerged in discussion, is that when a long-term investor is trying to put a trade on – say, buy 50,000 shares of your stock – the automated traders often are the ones putting up the offers that match that bid and form the other side of the trade. Liquidity comes from more offers, and this lubrication enables people to own stocks less risk of being stuck.

My bottom line: Let’s NOT squash trading. Taxing trades will only add costs, ultimately borne by the people who own equities or mutual funds. And we ought to be very careful about dictating market structure based on an understanding of today’s needs and technologies – which tomorrow will already be changing.

Capitalism thrives in free markets. Rigidity in capital markets will inhibit the flow of money and hinder investment in new technologies yet to be envisioned. And let’s face it, the equity markets (however bumpy) ultimately enable businesses to exist, grow … or in some cases disappear. We don’t want to lock in the status quo.

Update Jan. 20 – After a week, our unscientific poll on whether share repurchases are a good way to create value shows 40% “It depends,” 35% “No” and 25% “Yes.”

An interesting comment on share repurchases – always a stock-market darling for some institutional investors – is reported today in the In Vivo blog, which covers pharmaceutical and biotech businesses and their capital markets:

During the breakout session after his talk here at the JP Morgan conference Sanofi CEO Chris Viehbacher was asked if Sanofi would consider a buyback. His answer was a resounding “no.” After explaining that his company was “clearly mindful of shareholder value” and citing Sanofi’s dividend as an example of that commitment, he gave his opinion on buybacks.

Companies resort to share repurchases when they’ve “run out of any ideas,” he said. “And the day we run out of ideas, I will retire on that day and let my successor do a share buyback.”

You have to give this CEO credit for his “over my dead body” directness.

My feeling is that repurchases make sense for some companies, in mature or out-of-favor businesses for example, as financial engineering that helps share value.

A firm with growth opportunities crying out for investment – say, new drug R&D projects needing 15-20% of revenues – can argue it has a better idea for using shareholders’ cash. Of course, then management has to deliver on the promise of those investments.

Brian Wesbury, chief economist at First Trust Advisors, is seeing V’s everywhere. A strong recovery, he believes, is in full swing for the US economy. The stock market, of course, is up. His graphs all show a V-shaped ascent after the nosedive of 2008.

Yet people everywhere are still worried, intent on reliving the worst of the 1930s:

What I sense is that the panic [Autumn ’08] altered a lot of psyches. It’s like people are in the grip of an economic ‘Stockholm syndrome.’ The Stockholm syndrome is when people taken hostage fall in love with their captors. In the panic, people fell in love with pessimism.

Wesbury doesn’t buy into the “pall of pessimism” or the “new normal” idea that has become conventional wisdom. He’s confident that we are fast returning to the “old normal” (except for unemployment, which he expects to improve but stay stubbornly high – largely because government is gobbling resources that might have fueled private businesses). Overall, he’s an unabashed optimist:

I believe we’re in a V-shaped recovery that’s going to take [the market] back to the pre-Lehman levels: 12,500 on the Dow. The question is whether whether we’re going to 13-, 14- or 15,000.

People are out to get us - at least, a few people are out to get our material nonpublic information and rob the market by taking illicit advantage of that info.

Leaks are damaging - to the companies named in investigations, cheated shareholders, busted “tippers” and traders, and everyone’s confidence in the markets.

As guardians of the company’s reputation, investor relations professionals ought to be advocates for vigilance. Working with Legal, we should be on this case – paranoid about information flow and zealous about preventive practices.

Not that any level of protection can completely guard against deliberate corruption of individuals like that alleged in the Galleon Group and other recent cases. It’s like any other kind of stealing: Doors, locks and alarms only protect us to a point. But we do have doors, locks and alarms. Our information flow should, too.

I’ve been watching the news stories for the roles of corporate and agency IR people – for better or worse. One IR consultant was tagged early on as an alleged leaker, and one company apparently used surveillance to catch an employee sending out secrets on a fax machine. Executives, lawyers, hangers-on and traders have been charged so far. At some point as the scandal continues to unfold, we may get a broad look at the role of security measures (or lack of them) in these leaks.

Meanwhile, well-known corporations whose M&A deals or earnings allegedly were leaked to the scoundrels continue to be in the press. When an employee or outside person hired by a company is charged in a criminal prosecution, make no mistake, it does damage the company’s reputation. The only good solution is prevention.

So what can IR do to protect against leaks and improper trading? A few ideas:

Beware of the investor who habitually pushes for an “edge.” Everyone is looking for unique insights, and they maythink their mosaic is such an edge. But some callers barrage you with more demanding questions – probing beyond what they know a company should provide. Stand on good disclosure practices – provide the right info, nothing more. Warn executives about pushy individuals. If a caller fails with IR and starts calling other people in the company, set him straight or cut him off. Legitimate investors play by the rules.

Be sure everyone in management, including admin assistants, understands that they must know who they’re talking to before answering any question – and all investor calls should be transferred to IR. It’s wrong for a plant manager or R&D scientist to talk to an investor outside the approved IR process.

Don’t discuss confidential information with colleagues in a coffee shop, on a plane or over your cell phone in a crowded place. Find a private place.

Have a clear policy for all employees’ treatment of confidential information – financial, competitive, or related to the privacy of customers or colleagues. Single out the criminal nature of trading on material nonpublic information.

Train new employees (and outside contractors) in that corporate conduct policy, and remind everyone of its key points at least once a year. Consider using the current scandal as an intro to a company-wide email or memo on this topic.

Give ongoing counsel to people involved in the earnings process or run-up to any kind of M&A. I’ve been asked to sign in blood on special nondisclosure agreements when helping on some deals – and that’s a good thing. You’re not accusing anyone of bad intentions, just cautioning against inadvertent slips.

Try not to feed office gossip. I don’t know if code names for deals or secret off-site meetings really hinder the grapevine – people in Sales will always speculate on whose limo is parked at the front door – but we should make an earnest effort to keep a “door” or “lock” on confidential information.

Monitor social media for the company’s name and key brands. Marketing or PR already may be monitoring to measure visibility and customer sentiment; get into the loop. Business data or speculation from employees shouldn’t be showing up on Twitter, FaceBook or good old Yahoo. Chase down anything that appears to be a leak, and enforce the confidentiality policy.

Watch the market for unusual trading before an event like earnings or a deal. Bring Legal into the discussion if you have suspicions of improper trading. That would become a complicated legal issue very fast, but the initial alarm could come from your daily observation of the market for your stock.

I like a suggestion from a lawyer that appeared in The New York Times (“Executives Are Wary After Arrests”) a few weeks ago. The story said “switchboards are lighting up” at law firms as tech executives and hedge fund managers ask advice on where the legal lines are drawn. One piece of free advice seems especially pertinent:

Nathan J. Muyskens, a government enforcement lawyer at Shook, Hardy & Bacon, said that clients had been asking him if they should send companywide e-mail messages reminding people not to say anything questionable, even a joke, on the phone. He said he told them they should.

“I’ve heard that there have certainly been memos going out: ‘Think of the phone just as you think of your e-mail these days,’ ” he said. “We always say, ‘Think of that e-mail as being on the front page of The New York Times before you hit the send button,’ and now it’s exactly the same for the phone.”

As I said in an earlier post (“Loose lips sink … IR”), it’s usually a bright line for IR between public information and nonpublic. The alleged leaks at the heart of the Galleon cases have to do with things like companies planning to be acquired or missing their earnings estimates – no brainers in the area of confidentiality.

Everyone loses when people on any side of the capital markets betray the shareholders’ trust for private gain. If you don’t think these insider trading stories are ugly, wait ’til we see the regulatory or legislative reactions in 2010. Congress is on a tear to “do something” in response to scandals – and the “fix” isn’t likely to improve the climate for open and legitimate communication with our investors.

If this were the lead on a story in Time or Newsweek, it might be a contrarian signal that stocks are heading for a prolonged bull market. But “The Equity Culture Loses Its Bloom” is in the December ’09/January ’10 issue of Institutional Investor.

In a somber but interesting long-term look at the markets, II lays out demographic, psychological and legal reasons for a cooling of the passion for equities that investors felt from the ’80s through the ’00s (with occasional nasty setbacks).

Pundits no less than Jeremy Siegel and Roger Ibbotson weigh in on how aging baby boomers, bruised by two bear markets in 10 years, are fleeing from stocks. On the upswing: funds that invest in bonds, infrastructure and hard assets that produce income, seen as more retirement-friendly.

A few images from the article’s crystal ball:

About 68 million Americans reach retirement age in the next 10 years will favor investments less prone to “wild fluctuations” than equities.

Pension funds are shifting toward bonds, driven by a 2006 law.

A Grant Thornton study shows the number of public companies in the US dropped 38% in the past 11 years.

Waning interest in equities will discourage new IPOs, and investment banks will put more emphasis on debt underwriting.

“Banks’ equity research departments can expect to feel a pinch,” including continued cutbacks in analyst coverage.

Of course, the obituary of equity markets has been written before – and II emphasizes it is talking about a loss of vitality, not the death of stocks. We should never bet too much on taking recent datapoints and drawing a line through them.

And then there are those who see the trend through a contrarian prism. Clifford Asness, head of AQR Capital Management, talks about the long-term decline of IPOs and shift in investor preferences toward bonds. But then he adds:

The decline of the equity culture means, all else equal, it’s time to invest in equities.

Just about everyone is happy to see 2009 fading into history and brighter prospects dawning with the new year. I share the enthusiasm for a new start, not to mention more favorable year-over-year comparisons. And I wish you personally a healthy and prosperous 2010.

The first question we confront, as communicators who will often cite the year in presentations and conversations, is how to say it – 2010, that is. People have been chattering on Twitter and other forums about whether “two thousand ten” or “twenty ten” is the way to pronounce 2010. I’ll put my vote in for “twenty ten.”

This view finds support from a New Year’s Day column in the San Francisco Chronicle, which cites a grammar zealot who “cringes” at hearing two thousand ten after a century of nineteen such-and-such. Then, more moderately, a linguist: